Maine Voices: Land value taxation could bring a surge of new construction

A news article in a recent Portland Press Herald reported on a dramatic 23 percent decline in car ownership – 26 percent per capita! – in the city of Portland over the past seven years.

This great news was followed by a Press Herald editorial on July 30 urging the city to encourage this trend by relaxing minimum parking requirements, providing better walking and cycling access from off peninsula, and maybe even restoring streetcar service.

Another policy change that the city should consider is a change to land value taxation, or LVT.

LVT is a property tax system that dramatically reduces tax rates on buildings and increases land taxes to make up the difference, while keeping total property taxes the same as before.

A dozen or more cities in Pennsylvania have already changed to this system, or are actively working on this change.

Reducing taxes on buildings encourages developers to put up new buildings, including rental apartments and condos, by reducing the long-term costs of owning and operating a building.

At the same time, a higher tax on land discourages speculators from holding empty lots for years or even decades, while waiting for the value to rise enough to make a killing on the land, without ever building anything on it.

The value of vacant land is greatly affected by what is built on other nearby lots.

Land speculators are, in effect, gambling on if and when new buildings go up on nearby lots. By raising the “holding costs” for empty lots, the city can pressure land speculators to either develop their own vacant lots, to bring in enough revenue to cover the higher holding costs, or sell the land to someone else who can and will develop the empty lots.

Under Portland’s current property tax system, even ordinary surface parking lots can bring in enough revenue to cover the low taxes on otherwise vacant land, allowing speculators to leave it undeveloped for many years.

Several city blocks of surface parking just south and east of the Cumberland County Civic Center show the undesirable effects of Portland’s current low land taxes.

But Portland simply can’t afford to have so much of its limited downtown land area tied up in such unproductive uses.

LVT can be introduced gradually, allowing owners of underutilized land time to adjust their plans without suffering sudden unexpected losses.

For example, Altoona, Pa., recently completed a 10-year transition to LVT, from 2002 to 2011, resulting in a significant increase in both the number and value of building permits.

In comparison, Johnstown, Pa., a similar-size city about 40 miles west of Altoona, has not made the change to LVT and is still enduring a decades-long decline in building permits.

Harrisburg, Pa., the state capitol, with a population slightly less than Portland, changed to a graded tax system, taxing land at six times the mil rate of buildings and other improvements.

It has seen a big increase in new construction, despite other financial blunders that may bankrupt the city government.

While the benefits of LVT or a graded tax system will be most evident in the downtown business area, homeowners have little to fear.

Most homeowners will see a small reduction in total property taxes, with the only likely increases being for smaller than average houses on unusually large lots.

Maine state law now requires municipalities to tax all property at the same mil rate.

But this law was probably intended to prevent blatant tax discrimination, such as taxing out-of-town property owners at higher rates than residents, or taxing rental apartment buildings at higher rates than owner-occupied condominiums.

It should easy enough to convince the Legislature to pass enabling legislation for LVT, as long as all land is taxed at the same mil rate citywide, and all buildings are taxed at the same mil rate citywide.

Furthermore, this change can be made at low cost to the city, without requiring an expensive revaluation, since the property tax database already includes separate valuations for land and buildings.

In summary, a change to Land Value Taxation could bring a surge of new construction to downtown Portland, ease the very tight rental housing market, and draw in still more creative people ready to live without money-sucking cars.

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